BANQUE CENTRALE DU LUXEMBOURG

Regulation of the Banque Centrale du Luxembourg 2020/ No. 28

of 18 May 2020

amending the Regulation of the Banque Centrale du Luxembourg 2014/ No. 18

of 21 August 2014 implementing ECB/2014/31 on temporary additional measures concerning Eurosystem refinancing operations and collateral eligibility

The Directorate of the Banque Centrale du Luxembourg,

Having regard to the Treaty on the Functioning of the European Union and in particular Article 127(2), first indent;

Having regard to the Statute of the European System of Central Banks and of the European Central Bank, and in particular Articles 3.1, 12.1 and 18;

Having regard to Article 108bis of the Constitution;

Having regard to the Law of 23 December 1998 on the monetary status and the Banque Centrale du Luxembourg (hereinafter the "Central Bank"), as amended, in particular Articles 2(1), 2(2) and 34(1);

Whereas:

(1) Under Article 18.1 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the "ESCB Statutes"), the European Central Bank (ECB) and the national central banks of the Member States whose currency is the euro (hereinafter the "NCBs") may carry out credit operations with credit institutions and other market participants on the basis of appropriate collateral for loans, in order to achieve the objectives of the ESCB. The general conditions under which the ECB and the NCBs are willing to carry out credit operations, including the criteria determining the eligibility of collateral for Eurosystem credit operations, are defined in European Central Bank (ECB/2014/60) Guideline (EU) 2015/510¹.

(2) In addition to the collateral easing measures it had already adopted on 7 April 2020, the Governing Council adopted a new series of decisions on 22 April 2020 to respond to the COVID-19 pandemic. These new measures aim to mitigate the adverse consequences on Eurosystem collateral availability of rating downgrades that the economic fallout from the spread of COVID-19 is likely to generate. Together with the measures adopted on 7 April 2020, these new measures aim to ensure that Eurosystem counterparties are able to retain and mobilise sufficient collateral in order to participate in liquidity-providing operations, and that the Eurosystem is therefore in a position to support the provision of credit to the euro area economy. Consequently, participation in these operations accompanied by this collateral should be based on temporarily modified collateral eligibility criteria and risk control measures.

(3) These new measures are proportionate to combat the serious risks to price stability, the monetary policy transmission mechanism and the economic prospects of the euro area, which are due to the emergence of COVID-19.

(4) In view of the foregoing, the Governing Council considers that the Eurosystem may temporarily continue to accept as collateral negotiable assets as well as issuers of these assets that meet the minimum credit quality requirements on 7 April 2020, notwithstanding a deterioration in credit ratings decided by credit rating agencies accepted by the Eurosystem, as long as these ratings are above a determined level of quality. At the same time, the Governing Council considers that this should have no impact on the eligibility criteria for outright purchases under the ECB's asset purchase programmes.

(5) In order to ensure the proper functioning of the monetary policy transmission mechanism and taking into account the need for Eurosystem counterparties that participate or will participate in the Eurosystem's liquidity-providing operations to retain sufficient collateral in order to participate in these operations, the Governing Council considers that the additional temporary measures provided for by this Regulation implementing the European Central Bank's Guideline of 7 May 2020 amending Guideline ECB/2014/31 on temporary additional measures concerning Eurosystem refinancing operations and collateral eligibility (ECB/2020/29) should apply until the first early repayment date provided for by the third targeted longer-term refinancing operations (TLTRO-III) programme.

(6) It is therefore appropriate to amend the Regulation of the Banque Centrale du Luxembourg 2014/ No. 18 of 21 August 2014 implementing ECB/2014/31 on temporary additional measures concerning Eurosystem refinancing operations and collateral eligibility, as amended by the European Central Bank's Guideline of 7 May 2020 (ECB/2020/29), accordingly.

HAS ADOPTED THIS REGULATION:

Article 1. Amendments

The Regulation of the Banque Centrale du Luxembourg 2014/ No. 18 of 21 August 2014 is amended as follows:

1. The following Article 8bis is inserted:

Article 8bis
Admission of certain negotiable assets and certain eligible issuers on 7 April 2020

1. The terms used in this Article have the same meaning as in Guideline (EU) 2015/510 (ECB/2014/60).

2. Notwithstanding the provisions of Article 59(3), Article 71 and Article 82(1)(a) of Guideline (EU) 2015/510 (ECB/2014/60), negotiable assets - other than asset-backed securities - issued on or before 7 April 2020, which on 7 April 2020 had been assigned a public rating provided by at least one accepted ECAI and satisfying the Eurosystem's minimum credit quality requirements, constitute eligible collateral for Eurosystem credit operations if at any time after 7 April 2020:
   a) these negotiable assets are subject to a public rating, provided by at least one accepted ECAI, which corresponds to at least credit quality step 5 in the Eurosystem's harmonised rating scale; and
   b) these assets continue to meet all other eligibility criteria applicable to negotiable assets under Guideline (EU) 2015/510 (ECB/2014/60).
   To clarify, the public rating on 7 April 2020 referred to in this paragraph is established by the Eurosystem under the rules provided for in Article 82(1)(a), Article 82(2), Article 83, Article 84(a) and (b), Article 85 and Article 86 of Guideline (EU) 2015/510 (ECB/2014/60).

3. Where the compliance of a negotiable asset with the Eurosystem's minimum credit quality requirements on 7 April 2020 is determined on the basis of a rating by an ECAI concerning the issuer or a rating by an ECAI concerning the guarantor assigned by an accepted ECAI system, this negotiable asset constitutes eligible collateral for Eurosystem credit operations if at any time after 7 April 2020:
   a) the rating by an ECAI concerning the issuer or the rating by an ECAI concerning the guarantor, as the case may be, for this negotiable asset, corresponds to at least credit quality step 5 in the Eurosystem's harmonised rating scale; and
   b) this negotiable asset continues to meet all other eligibility criteria applicable to it under Guideline (EU) 2015/510 (ECB/2014/60).

4. Negotiable assets - other than asset-backed securities - issued after 7 April 2020 whose issuer or guarantor, as the case may be, had on 7 April 2020 a public rating provided by at least one accepted ECAI system in compliance with the Eurosystem's minimum credit quality requirements, constitute eligible collateral for Eurosystem credit operations if at any time after 7 April 2020:
   a) these negotiable assets are subject to a public rating, provided by at least one accepted ECAI, which corresponds to at least credit quality step 5 in the Eurosystem's harmonised rating scale; and
   b) these negotiable assets meet all other eligibility criteria applicable to negotiable assets under Guideline (EU) 2015/510 (ECB/2014/60).
   To clarify, the public rating referred to in point (a) of this paragraph is assigned by the Eurosystem under the rules provided for in Article 82(1)(a), Article 82(2), Article 83, Article 84(a) and (b), Article 85 and Article 86 of Guideline (EU) 2015/510 (ECB/2014/60).

5. Covered bonds issued after 7 April 2020 under a covered bond programme which itself had been subject, on 7 April 2020, to a credit assessment carried out by at least one accepted ECAI system, and satisfying the Eurosystem's minimum credit quality requirements, constitute eligible collateral for Eurosystem credit operations if:
   a) at any time after 7 April 2020, this covered bond programme is subject to a public rating provided by at least one accepted ECAI system, corresponding to at least credit quality step 5 in the Eurosystem's harmonised rating scale; and
   b) these covered bonds meet all other eligibility criteria applicable to them under Guideline (EU) 2015/510 (ECB/2014/60).

6. The negotiable assets referred to in Article 87(2) of Guideline (EU) 2015/510 (ECB/2014/60) which, on 7 April 2020, did not have a public rating provided by an accepted ECAI system, but which on 7 April 2020 benefited from an implicit credit assessment carried out by the Eurosystem, under the rules laid down by Article 87(1) and (2) of Guideline (EU) 2015/510 (ECB/2014/60), in compliance with the Eurosystem's credit quality requirements, constitute eligible collateral for Eurosystem credit operations regardless of their date of issuance, if at any time after 7 April 2020:
   a) the issuer or the guarantor, as the case may be, of these negotiable assets corresponds, at least, to a credit quality requirement equivalent to credit quality step 5 in the Eurosystem's harmonised rating scale; and
   b) these covered bonds meet all other eligibility criteria applicable to them under Guideline (EU) 2015/510 (ECB/2014/60).

7. Notwithstanding the provisions of Article 59(3), Article 71 and Article 82(1)(b) of Guideline (EU) 2015/510 (ECB/2014/60), asset-backed securities issued on or before 7 April 2020, which on 7 April 2020 had been subject to at least two public ratings provided by two different accepted ECAI systems, and satisfying the Eurosystem's minimum credit quality requirements under Guideline (EU) 2015/510 (ECB/2014/60), constitute eligible collateral for Eurosystem credit operations if at any time after 7 April 2020:
   a) these asset-backed securities are subject to at least two public ratings, each provided by a different accepted ECAI system, and corresponding to at least credit quality step 4 in the Eurosystem's harmonised rating scale; and
   b) these asset-backed securities continue to meet all other eligibility criteria applicable to asset-backed securities under Guideline (EU) 2015/510 (ECB/2014/60).
   To clarify, the requirements provided for in Article 3(1)(a) to (d) and Article 3(4) of this Regulation do not apply to the asset-backed securities referred to in this paragraph.

8. Asset-backed securities that were accepted by the Eurosystem as eligible collateral on 7 April 2020 under Article 3(1) of this Regulation, remain eligible if at any time after 7 April 2020:
   a) they are subject to two public ratings, provided by two accepted ECAI systems, which correspond to at least credit quality step 4 in the Eurosystem's harmonised rating scale; and
   b) they continue to meet all other requirements applicable to them under Article 3(1) (except the rating level), Article 3(2bis) and Article 3(4) of this Regulation.
   To clarify, Article 3(2) and Article 3(5) of this Regulation do not apply to the asset-backed securities referred to in this paragraph.

9. As long as they continue to be accepted as eligible collateral by the Eurosystem under this Article, the negotiable assets, including covered bonds, referred to in paragraphs 2 to 6, are subject to the haircuts specified in Annex IIter to this Regulation. Asset-backed securities, referred to in paragraphs 7 and 8, are subject to the haircuts specified in Annex IIbis to this Regulation. The haircuts are calculated on the basis of the current rating applicable at any time after 7 April 2020 in accordance with the rules relating to the priority given to credit assessments carried out by an ECAI which are provided for in Articles 83 to 88 of Guideline (EU) 2015/510 (ECB/2014/60).

10. In addition to the haircuts defined in paragraph 9, the following additional haircuts apply:
    a) asset-backed securities, covered bonds and unsecured debt securities issued by credit institutions whose value is calculated theoretically in accordance with the rules of Article 134 of Guideline (EU) 2015/510 (ECB/2014/60) are subject to an additional haircut in the form of a 4% haircut valuation;
    b) covered bonds used for own account are subject to an additional haircut i) of 6.4% applied to the value of debt securities allocated to credit quality steps 1 and 2; and ii) of 9.6% applied to the value of debt securities allocated to credit quality steps 3, 4 and 5;
    c) for the purposes of point (b), "used for own account" refers to the submission or use, by a counterparty, of covered bonds that are issued or guaranteed by the counterparty itself or by any other entity with which this counterparty has close links as determined in accordance with Article 138 of Guideline (EU) 2015/510 (ECB/2014/60);
    d) if the additional haircut referred to in point (b) cannot be applied due to a collateral management system of an NCB, a tripartite agent or TARGET2-Securities for self-collateralisation, the additional haircut is applied in these systems or on this platform to the total value of issued covered bonds that can be subject to own use.

11. To clarify, the provisions of this Article are independent and are not taken into account in determining the eligibility of outright purchases under the public sector asset purchase programme on secondary markets²; the third covered bond purchase programme³; the asset-backed securities purchase programme⁴; the corporate sector purchase programme⁵; and the pandemic emergency purchase programme⁶. ».

¹ European Central Bank Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (Guideline on general documentation) (ECB/2014/60) (OJ L 91 of 2.4.2015, p. 3).

² European Central Bank Decision (EU) 2020/188 of 3 February 2020 on a public sector asset purchase programme on secondary markets (ECB/2020/9) (OJ L 39 of 12.2.2020, p. 12).

³ European Central Bank Decision (EU) 2020/187 of 3 February 2020 on the implementation of the third covered bond purchase programme (ECB/2020/8) (OJ L 39 of 12.2.2020, p. 6).

⁴ European Central Bank Decision (EU) 2015/5 of 19 November 2014 on the implementation of the asset-backed securities purchase programme (ECB/2014/45) (OJ L 1 of 6.1.2015, p. 4).

⁵ European Central Bank Decision (EU) 2016/948 of 1 June 2016 on the implementation of the corporate sector purchase programme (ECB/2016/16) (OJ L 157 of 15.6.2016, p. 28).

⁶ European Central Bank Decision (EU) 2020/440 of 24 March 2020 on a temporary pandemic emergency purchase programme (ECB/2020/17) (OJ L 91 of 25.3.2020, p. 1).

2. Annex IIbis is replaced by the following text:

ANNEX IIbis
Haircut rates (%) applied to asset-backed securities eligible under Article 3(2) and Article 8bis of this Regulation

Credit Quality	Weighted Average Life (*)	Haircut
Step 3	[0-1)	4.8
	[1-3)	7.2
	[3-5)	10.4
	[5-7)	12.0
	[7-10)	14.4
	[10,∞)	24.0
Step 4	[0-1)	11.2
	[1-3)	15.2
	[3-5)	18
	[5-7)	24.8
	[7-10)	30.4
	[10,∞)	43.2

• i.e. [0-1) weighted average life less than one year, [1-3) weighted average life equal to or greater than one year but less than three years, etc.

3. Annex IIter is replaced by the following text:

ANNEX IIter
Haircut rates (%) applied to negotiable assets, other than asset-backed securities, referred to in Article 8bis

Category I		Category II		Category III		Category IV
Credit Quality	Residual Maturity (in years) (*)	Fixed coupon and variable coupon	Zero coupon	Fixed coupon and variable coupon	Zero coupon	Fixed coupon and variable coupon	Zero coupon
Step 4	[0-1)	6.4	6.4	8	8	12.8	12.8
	[1-3)	9.6	10.4	12	15.2	16	18.4
	[3-5)	11.2	12	16	20	19.2	23.6
	[5-7)	12.4	13.6	20	24.8	22.4	28.4
	[7-10)	13.2	14.4	21.6	28.4	24.8	32
	[10,∞)	14.4	16.8	23.2	31.6	26.4	34.8
Step 5	[0-1)	8	8	12	12	22.4	22.4
	[1-3)	11.2	12	16	19.2	25.6	28
	[3-5)	13.2	14	22.4	26.4	28.8	33.2
	[5-7)	14.4	15.6	27.2	32	31.6	37.6
	[7-10)	15.2	16.4	28.8	35.6	33.2	40.4
	[10,∞)	16.4	18.8	30.4	38.8	33.6	42

• i.e. [0-1) residual maturity less than one year, [1-3) residual maturity equal to or greater than one year but less than three years, etc.

Article 2. Entry into force

This Regulation shall enter into force on the day of its publication.

Article 3. Publication

This Regulation shall be published in the Official Journal of the Grand Duchy of Luxembourg and on the website of the Central Bank (www.bcl.lu).

BANQUE CENTRALE DU LUXEMBOURG
The Directorate